Is Investing In NPS Worth It?

By | March 23, 2018

Surely NPS is a great investment vehicle for retirement planning. But is it the right investment for you? Let’s find out.

Let’s start with a quick intro about National Pension Scheme (aka NPS). NPS is basically a government-initiated pension scheme. Salaried employees and the self-employed lot can voluntarily invest in this scheme and claim tax deductions under Section 80CCD. NPS investors can claim an additional tax benefit up to Rs. 50,000 under Section 80 CCD (1B) too.

NPS is a major step taken by the government to turn India into a pensioned society. And with tax benefits being the key driver of investment decisions here, NPS is quite a lucrative option. However, it still faces a lot of investor flak. Two reasons behind this strong negative sentiment towards NPS were its exit/withdrawal rules and taxation of the corpus. Let’s dig a little deeper, shall we?

Watch This: All You Need To Know About Investing In NPS

NPS: Exit/Withdrawal Rules

With NPS, an exit or withdrawal before the age of 60 is discouraged. Earlier, those investing in NPS couldn’t even access their money, even in the case of emergencies. This absence of liquidity clearly didn’t favour NPS investments, terming it as a not-so-investor-friendly scheme.

Partial Withdrawal

The earlier rule wherein investors couldn’t access their money before superannuation was later revised. And NPS investors were allowed to make partial withdrawals even if they hadn’t turned 60. But it was only allowed for specific cases such as life-threatening medical emergencies, child’s education or marriage, etc.

And they could withdraw only 25% of their contribution. Additionally, they could partially withdraw from their NPS kitty only three times in the entire tenure and these withdrawals are allowed in intervals which are not less than five years.

Early Exit

If an investor wanted to exit from NPS before superannuation (i.e. before they reached 60 years of age), they were allowed to withdraw up to 20% of their corpus only. The remaining 80% had to be re-invested in annuities. For those of you who don’t know, an annuity is a financial product that provides you with a pension or an income based on the lump-sum investment you make.

Normal Exit

On superannuation, investors can withdraw 60% of the corpus. The remaining 40% will be converted into an annuity. Out of the 60% which can be withdrawn, 40% is tax exempt, but the remaining 20% is taxable. The annuity income will be taxed too, according to the investor’s tax slab.

Additional Reading: NPS Calculator – Know about Pension Calculator

NPS: The Investment Strategy

Today NPS allows only 50% investment in equities for investors who choose the ‘active choice’ option. Before we go into further details, you should know that there are two ways to invest in NPS – investment via a predetermined plan and investment via ‘active choice’. In the former, investment is done based on the investor’s age and the tenure of the NPS subscription.

The latter, on the other hand, allows investors to choose their asset allocation and lets them invest in any of the four fund schemes in proportions of their choice. It currently offers four different funds to choose from – government securities, corporate bonds, equities, and alternate investment funds. However, they cannot put more than 50% in equity funds.

In an effort to help the ‘active-choice’ investors get better returns from their NPS subscription as well as increase positive sentiments towards NPS, the PFRDA (Pension Fund Regulatory & Development Authority) has proposed to increase the investment in equities to 75% from the existing 50%.

So, will this help NPS build a better reputation among investors? “If the PFRDA’s proposal to increase equity investment to 75% is implemented, it would be a great facelift for NPS,” Kavya Balaji, Senior Finance Editor at BankBazaar commented. She added, “Financial experts have always advised that you choose equities for your retirement as it is a long-term goal. So, this move will help NPS subscribers to get better returns and build a good retirement nest, provided they are open to equity investments.”

Final Thoughts

Though it does offer lucrative tax benefits, NPS hasn’t carved a place for itself in the investment market, unlike other investment products. We still see a mixed sentiment towards NPS from the investor community. Of course, NPS is a great choice for retirement planning. However, it shouldn’t be the sole instrument for the same. A well-diversified Mutual Fund portfolio, along with your NPS investment, can help you build a huge retirement nest for yourself.

Additional Reading: Why Investing In NPS Is A Good Idea

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